02 Dec 2009

European Central Bank governors meeting tomorrow are expected to leave their main interest rate unchanged at a record low of 1% while preparing banks for a gradual end to massive supplies of central bank cash.

ECB president Jean-Claude Trichet will carefully avoid suggesting that interest rates might start to climb before economic recovery is well underway, however. The debt crisis in Dubai will also hang over the meeting in light of possible repercussions in euro zone countries.

But analysts say that this week’s ECB meeting should bring the first steps towards a gentle backdoor exit from unorthodox monetary policies aimed at boosting economic activity.

AdvertisementThe 16-nation euro zone has emerged from recession with unemployment at 9.8%, its highest level since December 1998, and Trichet warns often that the economic climate remains uncertain.

ECB staff projections for growth are nonetheless expected to be revised upwards from the last estimation of a 4.1% contraction this year and 0.2% expansion in 2010.

Meanwhile, inflation is back in positive territory for the first time in seven months but likely to remain below the ECB target of just under 2%.

The ECB has held its main rate at 1% since May, above the US Federal Reserve’s rate of around zero and the Bank of England’s main rate of 0.5%.

The ECB has sought to boost bank lending by providing unlimited amounts of central bank cash at that rate, including record one-year loans of €442 billion in June.